Wednesday, April 24, 2019

The Model Thinker #15 : Lyapunov functions and equilibria.


Image result for Lyapunov function

I don't really want to get to the mathematical derivation of Lyapunov functions but they are a class of equations that allow us to predict whether a process will reach a state of equilibrium.

One example of how a Lyapunov function be used in a real world situation is to model a Race to the Bottom situation.

Imagine a game where governments get to set the amount of investment taxation. The heuristic to  set these taxes is to set it at 90% of the average of what other countries are setting last year so as to attract a larger share of investments from other countries. Over time, this game becomes a race to the bottom where the only equilibrium state is when every country imposes close to zero taxation.

This was probably what went around policy maker's head when they tried turning our local stock exchange into a REIT hub. To attract other countries to their their real-estate assets in Singapore, we simply make it as tax free as possible.

Even better for local investors, to maintain our position as one of the best places to launch REIT products, our government extended this tax break until 2025, ensuring that one of the conditions of a Perfect Storm for REIT investors would not manifest for another 5 years.

This game of race to the bottom to attract foreign listings is the reason why these tax breaks are likely to stay beyond 2025. The only way this can be taken away is when the Singapore voters gets so upset with inequality here that they make the ruling government lose another GRC. This is not likely the situation right now since the number of foreign workers is now under strict control.

But in the grander scheme of things, REITs democratise ownership of commercial property allowing someone to own a mall with less than $1,000, how can this play such a big role in generating inequality in Singapore ? Passive income from REITs are a lifeline to many retirees here.

I think a better move would be to remove legacy admissions from Primary schools and bring down the Special Apartheid Plan or SAP schools in Singapore.

Nothing disgusts me more than seeing virtue-signalling liberals entrenching a good life for their children by securing the best seats in  the schools along Bukit Timah road.

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